August 15th, 2013.
Unemployment figures set to determine Bank of England interest rates
Last week, Bank of England governor, Mark Charney, announced that they have no intention of raising interest rates until unemployment has fallen below 7%. It is estimated that this would require the creation and staffing of around 750,000 jobs, which could take around three years.
This message came despite an obvious increase in the Bank’s projections and greater outlook for the UK’s economy. The Bank has increased its growth forecast to 1.4% – a 0.2% jump up on their current service, with next year experiencing an even larger increase, from 1.7% to 2.5%. These predictions reflect a “renewed recovery [which] is now underway” largely helped by an increase in consumer spending.
Why take this stance?
Mr Charney claimed that this announcement has been made so that everyone can make financial decisions – whether they are investing or spending – with greater knowledge about how the interest rates will change. The governor commented that this move is needed now that “the recovery is just gathering some steam” and this new-found certainty will help people make more solid financial decisions.
As with all of the Bank of England’s policies, this one is subject to three ‘knock-outs’ which are:
• If CPI inflation is likely to be at or above 2.5% for over an 18 month period.
• Inflation looks like it may not be properly controlled during the medium term
• If the Financial Policy Committee believe this could be a threat to financial stability.
The Bank of England is not the first bank to make this decision, both the US Federal Reserve and the European Central Bank have also declared what their interest rate will be for future months. This is set to help out the current economic climate, which is shown to be picking up pace and gathering space. Mr Carney has said that he hopes this move will allow the UK to reach ‘escape velocity’ from the economic recession, creating more jobs and putting more money back into the system.
The director general of the British Chambers of Commerce agrees, believing that this move will help give many businesses a confidence boost to make important investments. It is estimated that the biggest deterrent in businesses making long term financial plans was their fear of being caught out by sudden increases in interest rates.
Meet the 7% ahead of schedule
There have been criticisms of this move, suggesting that unemployment figures could drop below 7% ahead of the 2016 prediction which would cause a re-evaluation of interest rates ahead of time. It is believed that this figure could be met at least one year earlier than expected, forcing the interest rates to change. Even the possibility of this premature rise caused the Great British Pound to increase on the currency markets, jumping up a whole cent against the dollar to stand at $1.5458.
What does this mean for commercial mortgage rates?
As most rates for commercial mortgages follow the way in which interest rates fluctuate this means that you can take out a loan knowing that the rates will stay low for at least two years, and potentially to 2016. This means that many start-up or expanding companies will be able to take out financing knowing that their rates won’t sink them. This steady mortgage rate will help more businesses move from being in financial problems to full economic recovery, helping to create more jobs which will eventually increase the interest rates again.